[Several studies have hypothesized that economic consequences of mandated accounting procedures arise through impacts on firms' accounting-based loan covenants. However, this research has involved very little direct examination of the loan contracts. This study directly examines how public and private loan agreements were affected by an accounting procedure mandated by the SEC. It analyzes 24 loan agreements of 18 oil and gas firms that, as a result of an SEC requirement announced on May 6, 1986, recorded writeoffs of exploration costs for the first quarter of 1986. The principal finding is that, even for a mandated accounting procedure that caused both large financial statement differences and some technical violations of loan covenants, there were no observable economic consequences for the affected firms. This result casts doubt on the importance of economic consequences of other mandated accounting procedures that might operate through effects on debt covenants.]

ABSTRACT: Previous investigations of the incremental information content of current cost Income have focused on cross-sectional analyses, which assume that the relation between stock returns and specific price-level adjustments is the same for all firms. Beaver et al. [1982] suggest that such analyses may be misspecified and provide preliminary indications that the Incremental information content of current cost Income may be more evident in a time-series context. The study summarized here provides the first formal examination of the information content of current cost income and historical cost Income within a time-series context. Some evidence of Incremental information content in current cost income is found in the time-series analysis, even though none is evident in a cross-sectional analysis. However, incremental Information content is (at best) evident only for a small subset of industries where the correlation between historical cost income and current cost income is low; for the majority of industries, the two income measures convey essentially the same information.

[Previous investigations of the incremental information content of current cost income have focused on cross-sectional analyses, which assume that the relation between stock returns and specific price-level adjustments is the same for all firms. Beaver et al. [1982] suggest that such analyses may be misspecified and provide preliminary indications that the incremental information content of current cost income may be more evident in a time-series context. The study summarized here provides the first formal examination of the information content of current cost income and historical cost income within a time-series context. Some evidence of incremental information content in current cost income is found in the time-series analysis, even though none is evident in a cross-sectional analysis. However, incremental information content is (at best) evident only for a small subset of industries where the correlation between historical cost income and current cost income is low; for the majority of industries, the two income measures convey essentially the same information.]

ABSTRACT This study examines whether security analysts underreact or overreact to prior earnings information, and whether any such behavior could explain previously documented anomalous stock price movements. We present evidence that analysts' forecasts underreact to recent earnings. This feature of the forecasts is consistent with certain properties of the naive seasonal random walk forecast that Bernard and Thomas (1990) hypothesize underlie the well‐known anomalous post‐earnings‐announcement drift. However, the underreactions in analysts' forecasts are at most only about half as large as necessary to explain the magnitude of the drift. We also document that the “extreme” analysts' forecasts studied by DeBondt and Thaler (1990) cannot be viewed as overreactions to earnings, and are not clearly linked to the stock price overreactions discussed in DeBondt and Thaler ( 1985 , 1987 ) and Chopra, Lakonishok, and Ritter (Forthcoming). We conclude that security analysts' behavior is at best only a partial explanation for stock price underreaction to earnings, and may be unrelated to stock price overreactions.

This study examines whether security analysts underreact or overreact to prior earnings information, and whether any such behavior could explain previously documented anomalous stock price movements. We present evidence that analysts' forecasts underreact to recent earnings. This feature of the forecasts is consistent with certain properties of the naive seasonal random walk forecast that Bernard and Thomas (1990) hypothesize underlie the well-known anomalous post-earnings-announcement drift. However, the underreactions in analysts' forecasts are at most only about half as large as necessary to explain the magnitude of the drift. We also document that the “extreme” analysts' forecasts studied by DeBondt and Thaler (1990) cannot be viewed as overreactions to earnings, and are not clearly linked to the stock price overreactions discussed in DeBondt and Thaler (1985, 1987) and Chopra, Lakonishok, and Ritter (Forthcoming). We conclude that security analysts' behavior is at best only a partial explanation for stock price underreaction to earnings, and may be unrelated to stock price overreactions.

The papers by Subramanyam (1996) and Kasanen, Kinnunen, and Niskanen (KKN, 1996) both consider why managers manipulate accounting accruals. Subramanyam finds that discretionary accruals are associated with several performance measures, and concludes that managers' accrual choices increase the informativeness of accounting earnings. However, a strong competing alternative is that the ‘Jones model’ systematically mismeasures discretionary accruals, so that they contain a significant non-discretionary component. Unlike many US studies, KKN find strong evidence of earnings management in Finland, where Finnish managers set earnings to satisfy the demand for dividends by keiretsu-like institutional investors.

ABSTRACT: Several studies have hypothesized that economic consequences of mandated accounting procedures arise through impacts on firms' accounting-based loan covenants. However, this research has involved very little direct examination of the loan contracts. This study directly examines how public and private loan agreements were affected by an accounting procedure mandated by the SEC. It analyzes 24 loan agreements of 18 oil and gas firms that, as a result of an SEC requirement announced on May 6, 1986, recorded writeoffs of exploration costs for the first quarter of 1986. The principal finding is that, even for a mandated accounting procedure that caused both large financial statement differences and some technical violations of loan covenants, there were no observable economic consequences for the affected firms. This result casts doubt on the Importance of economic consequences of other mandated accounting procedures that might operate through affects on debt covenants.